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Court of Appeal of New Zealand |
Last Updated: 26 January 2018
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IN THE COURT OF APPEAL OF NEW ZEALAND
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CA603/2012
[2012] NZCA 610 |
BETWEEN OWEN FRANCIS TALLENTIRE
Appellant |
AND THE QUEEN
Respondent |
CA623/2012 |
AND BETWEEN WAYNE LESLIE DOUGLAS
Appellant |
AND THE QUEEN
Respondent |
CA624/2012 |
AND BETWEEN NEAL MEDHURST NICHOLLS
Appellant |
AND THE QUEEN
Respondent |
Hearing: 7-8 November 2012
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Court: Arnold, Harrison and Stevens JJ
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Counsel: N S Gedye for Appellant Tallentire
B D Gray QC and R J Sussock for Appellants Douglas and Nicholls N R Davidson QC, N R Williams and M K Thomas for Respondent |
Judgment: 20 December 2012 at 4.00 pm
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JUDGMENT OF THE COURT
The appeals against conviction and sentence are dismissed.
____________________________________________________________________
REASONS OF THE COURT
(Given by Stevens J)
Table of Contents
Para No
Introduction [1]
Background facts [4]
The Numeria 1 transaction [9]
The Clyde transactions [22]
Numeria 2 [41]
High
Court reasons for verdict [49]
The elements of the offence [51]
Previous s 220 cases [52]
Intention [53]
No concealment [55]
The central issue –
intention [57]
The correct test for intention [58]
Appellants’ submissions [66]
Respondent’s submissions [76]
Intention – our
analysis [80]
Numeria 1 [83]
Numeria 1 – our analysis [94]
Clyde 1 [104]
Clyde 1 – our analysis [110]
Clyde 2 [120]
Clyde 2 – our analysis [124]
Numeria 2 [131]
Conclusion on conviction appeals [137]
Sentence appeal [138]
Judge’s approach [139]
Submissions on
sentence [152]
Messrs Douglas and Nicholls [152]
Mr Tallentire [162]
Respondent’s submissions [169]
Our evaluation [178]
Result [189]
Introduction
[1] These three appeals concern prosecutions arising out of the affairs of the collapsed finance company Capital + Merchant Finance Ltd. Following a trial before Wylie J in the High Court, Messrs Douglas and Nicholls were convicted of three charges of theft by a person in a special relationship contrary to s 220 of the Crimes Act 1961.[1] Each was sentenced to seven and a half years’ imprisonment.[2] Mr Tallentire was convicted of two charges of theft by a person in a special relationship and sentenced to five years’ imprisonment. All three appellants appeal against both conviction and sentence. On the conviction appeals, the arguments raised by each appellant are the same.
[2] The appellants were directors of Capital + Merchant Finance Ltd.[3] That company was placed into liquidation on 15 December 2009. The convictions under appeal relate to the appellants’ conduct in four transactions involving funds held by Capital + Merchant Finance Ltd. The essence of each charge was that the appellants, knowing they had to deal with investor’s funds in accordance with the provisions of the Capital + Merchant Finance Ltd debenture trust deed, intentionally departed from those obligations.
[3] We were told this was the first case to be tried in the High Court in which finance company directors have faced s 220 charges arising from alleged breaches of the provisions of a debenture trust deed. The primary issue on the appeals against conviction concerns the correctness of Wylie J’s interpretation and application of the intention element required for theft under s 220. The appeals against sentence are advanced on the ground that the sentences are manifestly excessive.
Background facts
[4] The essential factual background is not in dispute. For this reason our description of the four transactions closely follows the descriptions carefully and comprehensively outlined by Wylie J in the reasons for verdict.
[5] Capital + Merchant Finance Ltd was incorporated in 2002. Its business was the provision of loans for property development and construction projects. The range of financial services offered by Capital + Merchant Finance Ltd included term loans, revolving credit facilities and related fee-based facilities. These services were financed by borrowing funds from the public. In order to comply with s 33 of the Securities Act 1978, Capital + Merchant Finance Ltd’s fundraising was controlled by a debenture trust deed. Perpetual Trust Ltd acted as the trustee.
[6] There are two key provisions of the debenture trust deed. Clause 6(2) contained specific obligations concerning related party transactions as follows:
6(2) The Company and each of the Charging Subsidiaries covenants with the Trustee that none of them will, without the prior consent of the Trustee
(a) Restriction on Related Party Transactions
enter into any Related Party Transaction (as defined in clause 6(3)) except in the ordinary course of business and where the terms thereof are evidenced in writing and the consideration therefore is on the basis of an arms length transaction as between two unrelated parties contracting in an open market.
[7] Clause 6(4) of the trust deed also contained a number of general covenants:
6(4) General covenants
Each of the Company and the Charging Subsidiaries hereby covenants with the Trustee that it will–
...
(b) Carry on business
carry on and conduct its business in an efficient, prudent and businesslike manner,
...
(g) Compliance with Laws, etc
duly and promptly comply with all laws, directives and consents the non-compliance with which might give rise to a Charge or have a material adverse effect on the Company or may adversely and materially affect the rights or security of the Trustee or any Stockholder or Depositor under this Deed.
[8] The appellants were found to have intentionally dealt with investors’ funds contrary to these terms. The offences with which they were charged relate to four separate transactions. These are known as Numeria 1, Numeria 2, Clyde 1, and Clyde 2. On appeal counsel for all three appellants made no challenge to the factual findings of Wylie J concerning the corporate/trust structure of the entities involved. Neither was there any challenge to the Judge’s findings of how each transaction was carried out.
The Numeria 1 transaction
[9] The ownership structure of Capital + Merchant Finance Ltd as at June 2003, prior to Numeria 1, is conveniently illustrated by Diagram One (set out in the Appendix to this judgment).
[10] The sole shareholder of Capital + Merchant Finance Ltd was Longbow Ltd, which was in turn wholly owned by Capital + Merchant Group Ltd. Capital + Merchant Group Ltd was owned by Investment Capital Trust Ltd, which was the corporate trustee of Investment Capital Trust. Messrs Nicholls and Douglas were the sole directors and shareholders of Investment Capital Trust Ltd. The beneficiaries of the Investment Capital Trust were the Boston Trust, of which Mr Nicholls was a discretionary beneficiary, and the Independence Trust, of which Mr Douglas was a discretionary beneficiary.
[11] The background to Numeria 1 concerned a company called Numeria Holdings Ltd which owned all of the shares in a finance company called Numeria Finance Ltd and a beach property at Omaha. In June 2003 Investment Capital Trust Ltd purchased Numeria Holdings Ltd from Wiltshire Equities Ltd. It paid $980,729 to acquire the shares in Numeria Holdings Ltd and $1,650,000 for the beach property.
[12] On 2 July 2003 Messrs Douglas and Nicholls became directors of a company named Paua Capital Ltd which became the trustee of the Paua Capital Trust. Mr Nicholls and his wife were the beneficiaries of this trust. In the same month, Numeria Holdings Ltd sold the beach property to Paua Capital Ltd to be held on trust for the Paua Capital Trust. The purchase price of $1,650,000 was obtained by way of a loan for the equivalent sum from Investment Capital Trust Ltd.
[13] The Numeria 1 transaction involved a loan of $7.66 million from Capital + Merchant Finance Ltd to Capital + Merchant Group Ltd to enable that company to purchase the 66 per cent shareholding in Numeria Holdings Ltd owned by Investment Capital Trust Ltd. This transaction formed the basis of count one of the indictment. It is modelled in Diagram Two.
[14] On 8 November 2004 Investment Capital Trust Ltd agreed to sell its shares in Numeria Holdings Ltd to Capital + Merchant Group Ltd. The purchase price was $10 million, with an initial payment of $6 million. At the same time, Capital + Merchant Group Ltd also agreed to purchase $1,660,000 of capital notes from Investment Capital Trust Ltd. Those notes had been issued by Numeria Finance Ltd.
[15] The total payment of $7.66 million made by Capital + Merchant Group Ltd to Investment Capital Trust Ltd was entirely financed by Capital + Merchant Finance Ltd.
[16] Capital + Merchant Group Ltd had applied to Capital + Merchant Finance Ltd for a loan of $7.66 million on 15 November 2004. The application was not accompanied by a valuation; rather, it relied upon a memorandum of cashflow projections for Numeria Finance Ltd that had been prepared by Mr Tallentire. Mr Tallentire calculated that the purchase of the shares in Numeria Holdings Ltd could generate a cashflow benefit for Capital + Merchant Group Ltd over the three year period from 2005 to 2007. He recommended that Capital + Merchant Group Ltd purchase capital notes issued by Numeria Finance Ltd to Investment Capital Trust Ltd for $1,660,000 and that it should purchase the shares in Numeria Holdings Ltd and pay Investment Capital Trust Ltd $6 million immediately, a further $2 million provided the 2006 results were to forecast and a further $2 million provided the 2007 results were also to forecast. As we shall explain, the Judge found that Mr Tallentire’s calculations were “flawed”. Furthermore, Mr Tallentire’s memorandum was “inadequate as a valuation”.[4] Capital + Merchant Finance Ltd’s lending committee approved the application on the same day it was made. The lending committee summary approving the loan was signed by Mr Douglas, Mr Tallentire and a Mr Smith, the lending manager of Capital + Merchant Finance Ltd.
[17] Capital + Merchant Finance Ltd advanced $6 million to Capital + Merchant Group Ltd on 30 November 2004. That money was then paid to Investment Capital Trust Ltd, which used part of the money to settle prior loans from Capital + Merchant Finance Ltd. The $1,660,000 payable in relation to the capital notes was advanced to Capital + Merchant Group Ltd on 24 December and paid to Investment Capital Trust Ltd on the same day.
[18] A security agreement was put in place on 10 December 2004. The security for the loan was the shares in Numeria Holdings Ltd and the capital notes issued by Numeria Finance Ltd.
[19] As a result of this transaction Investment Capital Trust Ltd recorded a capital gain of $5,019,443. This was calculated by reference to the difference between the price Investment Capital Trust Ltd paid for Numeria Holdings Ltd in June 2003 and the amount paid by Capital + Merchant Group Ltd in November 2004.
[20] This capital gain was distributed to five trusts associated with Mr Douglas and Mr Nicholls. That distribution is explained in Diagram Three. Notably, the $1,650,000 distributed to the Paua Capital Trust operated to offset the sum that Investment Capital Trust had previously lent to Paua Capital Ltd to finance its acquisition of the Omaha beach property. The effect of this distribution was that the Paua Capital Trust obtained ownership of the beach property without making any payment for it.
[21] The loan from Capital + Merchant Finance Ltd to Capital + Merchant Group Ltd was a related party transaction under the terms of the trust deed. Although the prior consent of Perpetual Trust Ltd was not sought, the transaction was later disclosed as part of regular reporting requirements of the debenture trust deed.[5]
The Clyde transactions
[22] The ownership structure of the relevant companies prior to the Clyde transactions is illustrated in Diagram Four. The Clyde transactions took place at the same time in about November 2006.
[23] By then changes had been made within the Capital + Merchant group of companies. For example, Investment Capital Holdings Ltd (the trustee of Bluewater Trust) had been incorporated as a wholly-owned subsidiary of Investment Capital Trust Ltd, and Capital + Merchant Business Finance Ltd had been incorporated as a subsidiary of Capital + Merchant Group Ltd.
[24] The next group of companies shown in Diagram Four is the Cymbis group. This structure had been created in order to replicate the Capital + Merchant corporate model in Australia. The ultimate parent companies of this group were Cymbis Trustees Ltd and Eques Securities Ltd. The shareholders and directors of Cymbis Trustees Ltd were Messrs Douglas and Nicholls. The shareholders and directors of Eques Securities Ltd were the members of the law firm Stace Hammond.
[25] The third corporate structure shown in the diagram relates to Clyde Investments Ltd. This company was the corporate trustee of the Clyde Trust. Mr Tallentire was the sole director and shareholder of Clyde Investments Ltd.
[26] The background to the Clyde transactions involved the desire of all three appellants to transfer control of the Capital + Merchant group and the Cymbis group from Messrs Nicholls and Douglas to Mr Tallentire. The latter had been exploring his options for funding the transactions in September 2006. This is illustrated in an email Mr Tallentire sent to a Mr Waddell, a Wellington sharebroker, on 4 September 2006:
... I currently have a price of $5 mill. cash and $8 mill secured debt or similar and paid down over 24 months. This purchase would have to be subject to no due diligence and is available to me as soon as I have found a way to do it. I am working on this.
My intention was to buy the businesses outright and then use a holding company and [management] company to operate them. To reduce my debt and service the holding company debt I intended selling shareholdings in the holding company.
[My] real problem is dealing with the internal issues such a transaction will create. I am dealing with this currently. CN’s related party lending possible loan losses if any etc. etc.
My own view was that laying hands on $5 mill. without due diligence was a big ask so I had not approached you yet.
I think there [may be] a profitable play in this. Are you interested???
[27] On 5 October 2006 a “heads of agreement” document was entered into by Messrs Douglas, Nicholls and Tallentire, Investment Capital Trust Ltd, and Cymbis Trustees Ltd. The agreement recorded the parties’ intention to transfer control by assigning the powers of appointment held by Messrs Douglas and Nicholls in the Investment Capital Trust and the Opua Trust to Mr Tallentire. The Clyde 1 and 2 transactions were the means by which this agreement was carried out.
[28] The Clyde 1 transaction comprised a loan of $7.7 million from Capital + Merchant Finance Ltd to Clyde Investments Ltd. This transaction formed the basis of count 2 of the indictment.
[29] On 1 November 2006 Clyde Investments Ltd submitted a loan application to Capital + Merchant Finance Ltd seeking $7.7 million “to provide finance to Cymbis Trustees Ltd as trustee of the Cymbis Trust”. This loan application was approved on the same day it was made. There followed a series of complex transactions, the detail of which it is not necessary to recount.[6]
[30] In summary, the funds advanced to Clyde Investments Ltd were on-lent to Cymbis Trustees Ltd and were ultimately used to fund a distribution of $6.5 million from Cymbis Trustees Ltd to Investment Capital Holdings Ltd as trustee for the Bluewater Trust. The Bluewater Trust then advanced the $6.5 million to a number of other entities, which resulted in those entities being able to repay pre-existing loans to Capital + Merchant Finance Ltd. That was step one in a whole process, the purpose of which was to shift the beneficial ownership of Capital + Merchant Group and the Cymbis Group to Mr Tallentire.
[31] The consent of Perpetual Trust to the Clyde 1 transaction was not sought.
[32] The Clyde 2 transaction comprised the loan of $4.4 million from Capital + Merchant Finance to Clyde Investments Ltd. This transaction formed the basis of count 3 of the indictment. It is set out in Diagram Five.
[33] On 1 November 2006, Clyde Investments Ltd submitted a loan application to Capital + Merchant Finance Ltd. The application sought $4.4 million to finance the purchase of shares in Capital + Merchant Business Finance Ltd from Capital + Merchant Group Ltd. That application was approved on the same day it was made.
[34] On 2 November, Capital + Merchant Group Ltd entered into an agreement with Clyde Investments Ltd, whereby it agreed to sell its shares in Capital + Merchant Business Finance Ltd to Clyde Investments Ltd for $4.4 million. The sale price was based on a valuation prepared by Mr Smyth, who was the Chief Financial Officer of Capital + Merchant Finance Ltd at that time. Yet Mr Smyth was not a valuer.
[35] On 3 November, the loan advance was transferred to Clyde Investments Ltd. Clyde Investments Ltd used those funds to pay Capital + Merchant Group Ltd $4.4 million. In return Capital + Merchant Group Ltd transferred ownership of the shares in Capital + Merchant Business Finance Ltd to Clyde Investments Ltd.
[36] Capital + Merchant Group Ltd then used the $4.4 million to purchase capital notes from Investment Capital Trust Ltd, which in turn distributed the $4.4 million received from this sale to Investment Capital Holdings Ltd as trustee of the Bluewater Trust. The beneficiaries of the Bluewater Trust were other trusts associated with Messrs Douglas and Nicholls.
[37] The consent of Perpetual Trust Ltd to the Clyde 2 transaction was not sought.
[38] In respect of both the Clyde 1 and 2 transactions the loan application forms contained statements that were wrong or misleading.[7] The errors in the Clyde 1 application were not appreciated by the lending committee because no inquiry was made.[8] The Clyde 1 application referred to a valuation prepared by a Mr Vallabh. He was not a valuer, rather a research analyst. The lending committee did not obtain any independent analysis or verification of the projections provided.[9] For the Clyde 2 transaction a “valuation” was obtained from Mr Vallabh but the lending committee made no inquiry into the valuation at all.[10] In terms of this “valuation” the Judge found:
[411] In my judgment, the “valuation” forming part of the loan application was woefully deficient. Any conscientious lending committee, properly considering the interests of its investors, would have required a full and independent valuation. No adequate valuation had been obtained by Clyde Investments Limited as the borrower, and a proper valuation by a qualified independent valuer was not required by the lending committee. It should have been.
[39] Significantly the performance of the lending committee itself was inadequate. As the Judge found:
[372] ... I note that it was Mr Smith’s evidence that when he was asked as a member of the lending committee to approve the Clyde 1 and 2 transactions:
I didn’t have a specific valuation in my hand from anybody. ... I didn’t have anything in my hand at the time; a specific valuation from any party; only the details that had been referred to in the application, so I was told that one had been done and one was available, I didn’t have a copy of it hence I put “refer to the application itself” [in the lending committee’s summary].
[40] We will identify other difficulties with the loan applications and the treatment of them by the lending committee when dealing with the question of intention below.[11]
Numeria 2
[41] The Numeria 2 transaction took place in 2007. The structure of the Capital + Merchant Group in March 2007 is set out in Diagram Six. Arising from the Numeria 1 transaction, Capital + Merchant Finance Ltd had provided a related party loan of $7.66 million to Capital + Merchant Group Ltd to enable it to purchase 66 per cent of Numeria Holdings Ltd and the capital notes. Interest on the loan was being capitalised and added to the loan advance. As a result, by 30 March 2007, the balance of the loan had increased to $9.1 million. Capital + Merchant Group Ltd had provided funds to Numeria Finance Ltd via the acquisition of $2.76 million of capital notes. Capital + Merchant Finance Ltd had funded Numeria Finance Ltd directly, by making a related party loan to the company of $6.3 million. Numeria Finance Ltd had funded Numeria Leasing Ltd with a $7.3 million related party loan. Numeria Leasing Ltd also had a funding arrangement with the BNZ. The loan as at 30 March 2007 was $8.1 million.
[42] The Numeria 2 transaction is depicted in Diagram Seven. Numeria 2 consisted of the sale of Numeria Leasing Ltd to Capital + Merchant Finance Ltd. This transaction formed the basis of count four on the indictment. Although none of the appellants were convicted on that count, we include a description of this transaction as it is relevant to the issues raised by this appeal.
[43] Numeria Leasing Ltd had been asked to repay its loan of $8.1 million to the BNZ. As a result, Numeria Leasing Ltd sought funding from ANZ. Before it would lend the monies, ANZ sought an assurance that Numeria Leasing Ltd was no longer part of Numeria Finance Ltd’s charging group. One way to ensure this was to sell Numeria Leasing Ltd to Capital + Merchant Finance Ltd.
[44] On 28 March 2007 Numeria Finance Ltd and Capital + Merchant Finance Ltd entered into an agreement for the sale and purchase of the shares in Numeria Leasing Ltd. The purchase price was $8.29 million. This price was based on a valuation obtained from Mr Vallabh. On 20 February 2007 Mr Smyth asked Mr Vallabh to prepare a valuation. Mr Vallabh responded on 4 March 2007. He advised that he had derived a value of $8.25 million using his discounted cashflow model.
[45] Numeria Finance Ltd then applied to Perpetual Trust for consent to sell Numeria Leasing Ltd. This consent was given on 29 March.
[46] Capital + Merchant Finance Ltd paid $8.29 million to Numeria Finance Ltd for the shares in Numeria Leasing Ltd on 30 March. On settlement, the shares in Numeria Leasing Ltd were transferred to Capital + Merchant Finance Ltd.
[47] Numeria Finance Ltd used the funds it received from the sale to pay a dividend of $7.79 million to Numeria Holdings Ltd. Numeria Holdings Ltd then paid a dividend of $7.79 million to Capital + Merchant Group Ltd. Capital + Merchant Group Ltd in turn used those funds to repay partially its loan to Capital + Merchant Finance Ltd.
[48] Overall, the money flow was largely circular: of the $8.29 million paid by Capital + Merchant Finance Ltd for the shares in Numeria Leasing Ltd, it received back $7.79 million when Capital + Merchant Group Ltd partially repaid its related party loans.
High Court reasons for verdict
[49] In his reasons for verdict, Wylie J described a number of matters of law common to all counts before dealing with each of the transactions separately. A number of the matters of law discussed by Wylie J were raised before us on appeal. For that reason it is appropriate to set out the Judge’s reasoning in relation to those issues.
[50] For reference, we set out the text of s 220:
220 Theft by person in special relationship
(1) This section applies to any person who has received or is in possession of, or has control over, any property on terms or in circumstances that the person knows require the person –
(a) to account to any other person for the property, or for any proceeds arising from the property; or
(b) to deal with the property, or any proceeds arising from the property, in accordance with the requirements of any other person.
(2) Every one to whom subsection (1) applies commits theft who intentionally fails to account to the other person as so required or intentionally deals with the property, or any proceeds of the property, otherwise than in accordance with those requirements.
(3) This section applies whether or not the person was required to deliver over the identical property received or in the person's possession or control.
(4) For the purposes of subsection (1), it is a question of law whether the circumstances required any person to account or to act in accordance with any requirements.
The elements of the offence
[51] Wylie J dealt with the elements of the offence in the reasons for verdict as follows:[12]
Prior to counsel making their closing submissions, I circulated a draft setting out what I considered to be the elements of the offence created by the section, and invited counsel to comment on the same. They did so, and it was agreed that the elements of the offence are as follows:
(a) Did the accused have control over property?
(b) Was the property in the control of the accused, in circumstances that required him to deal with the property, or any proceeds arising from the property, in accordance with the requirements of any other person?
(c) Did the accused know of those circumstances? And,
(d) Did the accused intentionally deal with the property, or any proceeds of the property, otherwise than in accordance with those requirements?
Previous s 220 cases
[52] The Judge then addressed the defence submission that the Crown had “overcharged” by invoking s 220. The defence submitted that this trial was very different to any previous trial involving s 220. In particular, this case was distinguishable as it did not involve any element of “concealment”. This was because each of the transactions had been disclosed to the trustee in a number of directors’ certificates and had been noted in multiple prospectuses. Furthermore, it was suggested that Parliament intended that the provisions of the Securities Act 1978, rather than those of the Crimes Act, were to be employed in dealing with cases of this nature. Wylie J rejected this submission, holding that the Crown was entitled to charge the accused under s 220. He noted that the applicable standard of proof – beyond reasonable doubt – placed a “heavy burden” on the Crown.[13]
Intention
[53] Later Wylie J dealt more fully with the requirement that each of the accused “intentionally” dealt with the property otherwise than in accordance with the requirements of Perpetual Trust Ltd. The Judge elaborated:
[240] The Crown submitted that an intentional act is an act that is done voluntarily and deliberately.
[241] Mr Gray took me through the legislative background to s 220. He argued that the Crown must prove beyond reasonable doubt that each of the accused knew, when he was dealing with the property, that he was acting otherwise than in accordance with the requirements set out in the debenture trust deed.
[242] Mr Gedye submitted that s 220 is a “full mens rea offence”.
[243] As is noted in Adams on Criminal Law, s 220 requires two different mental elements. First, the accused must know that he or she acquired the property on terms or requirements that required him or her to account for the property or its proceeds, or to deal with the property or its proceeds in accordance with the directions of another person. Secondly, the accused must have “intentionally” departed from his or her obligations.
[244] It is the actual state of mind of each of the accused that is in issue.
...
[247] The accused will have intended to breach the requirements set out in the debenture trust deed, if each of them:
(a) wanted to bring about that consequence; or
(b) believed it was possible for him to achieve something he wanted by bringing about that consequence, and
(c) behaved as he did because of his desire in either (a), or his belief in (b).
[248] There is no direct evidence of the intention of the accused in this case, and I will have to infer what each intended from the relevant facts which I accept as reliable. I deal with this below.
[54] The Judge correctly noted that the Crown did not need to prove dishonesty.[14] Accordingly the foundation for liability is the fact of intentionally dealing with property otherwise than in accordance with requirements that the accused knew to have been imposed in relation to that property by another person. We consider this aspect of the reasons for verdict later in this judgment.
No concealment
[55] As noted, in the High Court the appellants argued that the fact that there was no concealment was decisive in their favour. The Judge considered this submission noting the scope of disclosure in relation to each transaction.[15] In each case the Judge did not consider that the absence of concealment was determinative.[16]
[56] At various points of the argument on appeal Mr Gray QC for the appellants adverted to the absence of concealment, although this was not at the forefront of the appellants’ case. Neither could it be. Even in cases where the prosecution is required to prove dishonesty it has been held by this Court that a “dishonest concealment” is not necessary to establish fraud based on breach of fiduciary obligation.[17] In R v Simcock, the Court stated:
[64] Such limited disclosure as may have been made, and such limited explanations as may have been offered to the auditors and the trustee, were not enough to absolve [New Zealand Trade and Investment Corporation Ltd] and the appellant of liability for breach of fiduciary duty. We say this because there is not the slightest suggestion anywhere in the evidence (including the evidence which originated from the appellant) that there was ever any disclosure of the most relevant aspect of these transactions, namely the payment of $150,000 which the appellant received.
[65] Where a fiduciary relies on disclosure to avoid what would otherwise be liability for breach of fiduciary duty, it is elementary that full disclosure is required and that partial and incomplete disclosure and explanations are not sufficient. So the Judge’s finding that there was not proper disclosure was well open to her.
The central issue – intention
[57] Section 220 came into effect in October 2003.[18] It replaced theft by a person required to account (s 222), theft by a person holding power of attorney (s 223) and theft by misappropriating proceeds held under direction (s 224). In R v Sizemore Hansen J confirmed that s 220 was to be considered as “a new and discrete offence”.[19] A key aspect of the s 220 offence is that there is no requirement for the Crown to establish dishonesty. This distinguishes s 220 from the previous sections listed above.[20] It also distinguishes s 220 from the other offences contained in pt 10 of the Crimes Act, many of which do contain a dishonestly element.[21]
The correct test for intention
[58] In the course of the hearing the parties agreed that the requirement for “intention” under s 220 is two-fold. The Crown is required to prove both that the accused intended to enter into the transaction and that the accused intended to breach the relevant requirements. We agree with this conclusion. Section 220(2) requires that:
Every one to whom subsection (1) applies commits theft who ... intentionally deals with the property, or any proceeds of the property, otherwise than in accordance with those requirements.
[59] Thus the prosecution cannot merely establish that the accused intentionally dealt with the property. It must also establish that the accused intentionally dealt with the property otherwise than in accordance with the relevant requirements. This test is consistent with previous authority of this Court on the interpretation of s 220. For example, in Nisbet v R, the Court of Appeal approved the following question trail:[22]
- Are you sure that between 21 August 2007 and 18 September 2007, Mr Nisbet dealt with the GST refund otherwise than by ensuring that Whariki Limited could pay Blackbird Finance Limited within the 90-day period?
- Are you sure that, being aware of his obligation to ensure that the GST refund remained available to be used to pay Blackbird Finance Limited, Mr Nisbet deliberately dealt with it so as to cause it to be unavailable for that purpose?
[60] The first of these questions is directed at whether the accused intentionally dealt with the property in question; the second concerns whether he intended to breach the relevant obligation.
[61] The central issue on appeal, therefore, was whether Wylie J correctly applied this test. Mr Gray submitted that the Judge had erred by applying an incorrect test for intention. Mr Davidson QC for the Crown argued that Wylie J had correctly applied the relevant test. We discuss this issue below.
[62] A related issue concerns the meaning of “intention”. Usually there will be no direct evidence of such intention and it will be necessary for the prosecution to rely on inferences. In that event the approach of Gault J in Haynes v Ministry of Transport is apposite.[23] After referring to the fact that it is usual that a person intends the natural and probable consequences of his or her actions, Gault J stated:
The established means of determining intention are by evidence of words and conduct which are capable of being heard and observed and presented as evidence.
[63] Where it is shown that accused persons knew (or were wilfully blind as to whether) they were breaching the relevant obligation when they acted, an inference of intentional breach will be irresistible. Where such persons claim a lack of awareness, the claim may be rejected as implausible given the surrounding circumstances.
[64] Mr Davidson also cited to the recent decision of this Court in New Zealand Police v K(CA320/2011).[24] The issue there was whether intent to prevent a parenting order from being complied with had to be motivated by a specific intent to prevent compliance with a parenting order, or whether an oblique intention was sufficient. The Court concluded that an oblique intention was sufficient:[25]
... the law has long recognised the need to define criminal intent in a way which does not oblige the prosecution to prove that the prohibited outcome represented the defendant’s purpose or motive.
[65] We do not see the distinction between direct intention or oblique intention as assisting the analysis in the present case.
Appellants’ submissions
[66] The appellants submitted that Wylie J’s articulation of the test for intention was defective as it omitted any requirement to prove that the accused believed his actions to be in breach of the trust deed. As a result, the Judge’s interpretation turned s 220 into a strict liability test.
[67] This argument is best considered by reference to the text of the reasons for verdict. As we have seen, Wylie J described the “four elements” of the offence under s 220 thus:[26]
- (a) Did the accused have control over property?
- (b) Was the property in the control of the accused, in circumstances that required him to deal with the property, or any proceeds arising from the property, in accordance with the requirements of any other person?
- (c) Did the accused know of those circumstances? And,
- (d) Did the accused intentionally deal with the property, or any proceeds of the property, otherwise than in accordance with those requirements?
[68] Mr Gray did not challenge the formulation of any of the above steps. In particular he had no objection to the description of the mental elements (c) or (d). Nor did he challenge the question used by Wylie J throughout the reasons for verdict as a heading to his discussion of intention, namely “Did [the accused] intentionally deal with the property otherwise than in accordance with those requirements?” Mr Gray submitted that Wylie J’s error first became apparent when the Judge explained his approach to applying [149](d) as follows:
[214] There are two matters to be addressed in considering this element of s 220:
(a) First, was the property dealt with otherwise than in accordance with the requirements imposed?
(b) Second, was any failure to deal with the property in accordance with those requirements intentional?
[69] Mr Gray also pointed to [247], where the Judge outlined the circumstances in which the relevant intent could be established:
[247] The accused will have intended to breach the requirements set out in the debenture trust deed, if each of them:
(a) wanted to bring about that consequence; or
- (b) believed it was possible for him to achieve something he wanted by bringing about that consequence, and
- (c) behaved as he did because of his desire in ... (a), or his belief in (b).
[70] Counsel submitted that these passages are illustrative of Wylie J’s overall approach, which was to enquire into whether the accused intended to carry out the transaction, rather than into whether the accused intended to breach the requirements of the trust deed. He submitted that the “consequence” described by Wylie J was the carrying out of the respective transactions. Counsel contended that the Judge erred in holding that the requisite intention could be established merely by proving that the accused wanted to carry out the transaction, believed that it was possible for him to achieve something he wanted by carrying out the transaction, and behaved as he did because of his desire to carry out the transaction and his belief in the potential benefits.
[71] Mr Gray then referred to the manner in which Wylie J applied the test[27] to the Numeria 1 transaction. He submitted that the Judge first considered whether the property was dealt with otherwise than in accordance with the requirements imposed.[28] In answering this question the Judge described a range of relevant factual matters and detailed the “circumstances at the time of the lending”.[29]
[72] Next the Judge considered the second “sub-question”: whether the appellants’ failure to deal with the property in accordance with requirements was intentional.[30] Mr Gray submitted that at no stage did the Judge address the issue of whether the accused intended to breach the trust deed. Instead, the Judge focused on whether the accused intended to carry out or participated in the Numeria 1 transaction.
[73] Mr Gray submitted that a further example of this error occurred in the analysis of the Clyde 1 transaction. Mr Gray argued that the analysis of the factors relating to this transaction[31] was indicative only of proof of an intention to carry out the transaction. Thus Wylie J had only asked half of the relevant question. Mr Gray submitted that this error was demonstrated at [389], where the Judge held:
All of the accused were involved in the transaction from the outset. While they had varying levels of involvement, in my view, it is clear beyond any reasonable doubt that Messrs Douglas, Nicholls and Tallentire intended to bring the transaction about, and that they breached the requirements contained in the trust deed in order to achieve their ends. They were all driven by self interest. They subordinated the interests of Capital + Merchant Finance Limited and its depositors to their own interests.
(Emphasis added.)
[74] Similar arguments were made in respect of the Clyde 2 transaction. Counsel pointed in particular to the following paragraph:[32]
I am satisfied beyond reasonable doubt that the accused voluntarily and deliberately breached those requirements. They were motivated by self-interest. Messrs Douglas and Nicholls wanted to be paid out. Mr Tallentire wished to take over the Capital + Merchant Group and the Cymbis Group. They jointly set out to use investors’ funds for that purpose, and notwithstanding the requirements they knew were imposed on them in relation to those funds.
[75] When we suggested that the Judge was entitled to look at the evidence as a whole and infer that the accused must have formed the required intention, Mr Gray did not demur from that proposition. However, he submitted that at no point in the reasons for verdict had the Judge made it clear he was drawing such an inference. In summary, he submitted that, in the passages identified for each transaction, the Judge only considered the appellants’ intention to carry out the transaction rather than their intention to breach the trust deed.
Respondent’s submissions
[76] In response, Mr Davidson submitted that Wylie J applied the correct test for intention. He emphasised that the appellants’ argument focussed on a narrow reading of Wylie J’s reasons for verdict and excluded a number of relevant passages. He emphasised that the whole of the reasons needed to be read in context.
[77] Mr Davidson first endorsed the four-stage approach to liability under s 220 as set out at [149] of the reasons for verdict. He then pointed to the introductory paragraph at [236], where Wylie J stated:
If any of the requirements imposed in the debenture trust deed were intentionally breached, and the other elements of s 220 can be made out to the requisite standard of proof, then an offence has been committed under the Crimes Act. The standard of proof resting on the Crown is high, and the Court will not enter into the boardroom and attempt to second guess bona fide decisions made by directors.
(Emphasis added.)
[78] Counsel submitted that this was a direct reference to an intentional breach of the requirements of the trust deed and provided a clear indication that Wylie J was applying the correct test. Moreover, the intention element was correctly defined and the correct question regarding that element was posed in relation to each transaction.
[79] Next Mr Davidson referred to the Judge’s analysis of the four separate transactions. This involved considering first whether the property was dealt with otherwise than in accordance with the requirements imposed. Second, the Judge asked whether any failure to deal with the property in accordance with those requirements was intentional. Mr Davidson submitted that the Judge’s analysis of whether there was an intentional breach of the trust deed requirements actually fell under the first of these questions. For example, this is where the Judge noted that no independent valuations had been prepared, and that obvious conflicts of interest had been ignored. It was submitted that these are among the factors that support a finding that the accused intended to breach the requirements of the trust deed. For that reason, it was unsurprising that the appellants had failed to uncover any analysis of that issue when looking at the sections of the reasons for verdict dealing with the second question.
Intention – our analysis
[80] We have concluded that Wylie J did not err in his application of the test for intention. We are satisfied that, taken as a whole, the reasons for verdict amply demonstrate that the intention element was proved beyond reasonable doubt. We agree with Mr Gray’s criticism of the Judge’s description of the intention test at [247]. Such elaboration of the factors relevant to proof of intention was unhelpful. However, we are satisfied that the Judge did not actually apply the test which he set out at [247] but rather applied the test set out at [149]. We are also satisfied that this latter paragraph gives a correct summary of the intention requirement for liability under s 220. The issue set out at (d) of that section is taken directly from the wording of s 220. As Mr Gray accepted, it accurately stated what the prosecution was required to prove to establish the intention element. Moreover, the Judge’s factual findings and his analysis of the individual transactions amply establish that he applied the correct test to the facts.
[81] Finally, we are satisfied from our own independent consideration of the evidence and the individual transactions that in each case where guilty verdicts were entered the accused did in fact intend: (a) to enter into the transaction concerned and (b) to deal with the property deliberately otherwise than in accordance with the requirements of the trust deed.
[82] We will set out below the Judge’s reasons in respect of each transaction and identify the evidence that provides clear proof that each accused formed the requisite intention in respect of the charges on which they were convicted.
Numeria 1
[83] First, the Judge considered whether the appellants had control over the property. He was satisfied that Messrs Douglas and Nicholls did have such control, due to their position as directors of Capital + Merchant Finance Ltd at the relevant time. However, Wylie J was not satisfied that Mr Tallentire had control over the property. For that reason, Mr Tallentire was acquitted on count 1.
[84] Second, the Judge asked whether the circumstances required each of Messrs Douglas and Nicholls to deal with the property in accordance with the requirements of any other person. The Crown case on this point was straightforward:[33]
(a) Investors deposited funds with Capital + Merchant Finance Limited, in reliance on the prospectuses;
(b) The prospectuses referred to the trust deed and its requirements; and
(c) The trust deed between Capital + Merchant Finance Limited and Perpetual Trust Limited contained explicit requirements detailing how funds deposited by investors were to be treated.
Wylie J accepted the Crown submissions on this point. The Judge was satisfied that this requirement was met.
[85] The third issue was whether Messrs Douglas and Nicholls knew of those circumstances. Counsel for Messrs Douglas and Nicholls, Mr Gray, conceded that his clients were aware that, when considering whether to approve related party transactions, the restrictions in the debenture trust deed needed to be considered. Accordingly, this requirement was met.[34]
[86] Finally, Wylie J considered whether Messrs Douglas and Nicholls dealt with the property otherwise than in accordance with the relevant requirements. The Judge considered first whether the property was dealt with otherwise than in accordance with the requirements imposed.
[87] Clause 6(2) of the debenture trust deed imposed a requirement on the directors of Capital + Merchant Finance Ltd to obtain consent from Perpetual Trust Ltd for all related party transactions except where those transactions were in the ordinary course of business of the company. Accordingly, answering this first question required Wylie J to consider whether the Numeria 1 transaction was outside the ordinary course of business of Capital + Merchant Finance Ltd.
[88] Wylie J concluded that the transaction was in fact outside the ordinary course of business of Capital + Merchant Finance Ltd, the following factors being important to his decision:
- There was no independent valuation by a qualified valuer of the assets being secured by the loan (the shares in Numeria Holdings Ltd and the capital notes issued by Numeria Finance Ltd). Instead, Mr Tallentire’s memorandum (which was not a proper valuation) was relied upon.[35]
- Mr Tallentire’s calculations were flawed to such a degree that even a rudimentary investigation would have uncovered those flaws. His “valuation” memorandum contained “no discussion of the standard of value used, the rationale for the “valuation” approach taken, the reasonableness of and risks associated with the forecasts on which the earnings forecasts were based, the future maintainable earnings selected, or the specific multiple used to derive the capital value”.[36]
- Capital + Merchant Finance Ltd failed to ensure that conflicted directors dealt with or managed their conflicts. Messrs Douglas and Nicholls were found to be “irreconcilably conflicted”.[37]
- There was no understanding of the cashflow history, forecasts or creditworthiness of Numeria Holdings Ltd or Numeria Finance Ltd.[38]
- Capital + Merchant Finance Ltd did not make inquiries and satisfy itself as to how the loan would be repaid.[39]
- Capital + Merchant Finance Ltd did not discount the security being provided to its likely value if a forced sale were to result. Mr Blackie, an expert witness, gave evidence that the value of the shares should have been discounted by 50 per cent or more due to their lack of liquidity. This was not considered by Capital + Merchant Finance Ltd.[40]
- Finally, no collateral securities were taken from the principals of Capital + Merchant Group Ltd as the borrower. Although Messrs Douglas and Nicholls were the principals behind that company, they incurred no personal liability for repayment of the loan or payment of interest.[41]
[89] Accordingly, Wylie J held that the Numeria 1 transaction was contrary to cl 6(2) of the trust deed. For completeness, the Judge also recorded that the transaction was in breach of cl 6(4) of the deed (the general covenants).[42]
[90] Having satisfied himself as to the first question, the Judge then considered whether the failure to deal with the property in accordance with the requirements of the trust deed was intentional. The Judge concluded:
[326] I am satisfied, and again by a comfortable margin, that the accused voluntarily and deliberately breached the requirements contained in the debenture trust deed. They believed that it was possible for them to sell the shares in Numeria Holdings Limited, and the capital notes issued by Numeria Finance Limited, to Capital + Merchant Group Limited, by borrowing the money from Capital + Merchant Finance Limited, and they set out to achieve that end.
[91] The intent of Messrs Douglas and Nicholls could be inferred “from their involvement in the transaction” as follows:[43]
- The prospective sale and purchase was discussed at a board meeting of Capital + Merchant Finance Ltd, held on 17 March 2004.
- Messrs Douglas and Nicholls received Mr Tallentire’s memorandum and decided to proceed with the transaction.
- On 8 November 2004 Messrs Douglas and Tallentire, as directors of Investment Capital Trust Ltd, signed two agreements with Capital + Merchant Group Ltd, agreeing to sell the shareholding and the capital notes.
- On 15 November 2004, Messrs Douglas and Nicholls applied for finance. On the same day, Mr Douglas signed the lending committee’s summary approving the loan.
- The loan agreement was signed by Messrs Douglas and Nicholls, as was the security agreement.
- Messrs Douglas and Nicholls resolved as directors of Investment Capital Trust Ltd to sell the shares in Numeria Holdings Ltd and to approve the distribution of the capital gain of $5,019,443 resulting from the sale.
[92] In summarising his conclusions on intention, Wylie J stated:
[331] In my judgment, it was Messrs Douglas and Nicholls’ ultimate responsibility to monitor the company’s business affairs, and to ensure that it complied with the provisions of the debenture trust deed. They cannot avoid that responsibility by pointing to the limited involvement of others in discrete parts of the transaction.
[332] It is clear that Messrs Douglas and Nicholls intended to bring the Numeria 1 transaction about, and that they breached the requirements contained in the debenture trust deed in order to achieve their ends. They subordinated the interests of Capital + Merchant Finance Limited and its depositors to their own interests.
[93] Having concluded that the answer to all four questions was “yes”, Wylie J was satisfied beyond reasonable doubt that count 1 was proved against Mr Douglas and Mr Nicholls.
Numeria 1 – our analysis
[94] We have focussed directly on determining whether, in dealing with the intention element, the Judge fell into error. We are satisfied that he did not. First, knowledge by the appellants of the restrictions in the debenture trust deed was conceded.[44] Second, in considering the facts of the Numeria 1 transaction the Judge asked the correct question as to the intention element: “did Messrs Douglas and Nicholls intentionally deal with the property otherwise than in accordance with those [trust deed] requirements?” Third, he carefully analysed the commercial features of the transaction. As noted, Mr Gray accepted that it was open to the Judge to draw inferences as to the intention of the appellants from the nature of the transaction itself. Fourth, the Judge also considered whether the actus reus of the offence of theft was established. In this case the actus reus required that the accused participated in the transaction and that the transaction involved breaches of the requirements of the trust deed.
[95] It was no doubt for this reason that the Judge, under the rubric of the heading regarding intention, divided the analysis (as he expressly stated at [296]) into two parts:
- (a) whether the property was dealt with otherwise than in accordance with the requirements imposed (part of the actus reus); and
- (b) whether or not any failure to deal with the property in accordance with those requirements was intentional (the mens rea element).
[96] There was, however, a further aspect to the actus reus. That concerned the appellants’ involvement or participation in the various transactions. For completeness we add that any such participation in the particular transaction needed to be intentional or deliberate (the mens rea element).
[97] As we have seen the reasons for verdict of Wylie J dealt with each of these aspects. He found that both aspects of the actus reus had been established beyond reasonable doubt. He also found that the participation of Messrs Douglas and Nicholls in the Numeria 1 transaction was proved by the prosecution. The Judge stated expressly that they intended to bring that transaction about.[45] Instead, however, of repeating the question that he had asked about intention the Judge simply stated that “they breached the requirements contained in the debenture trust deed in order to achieve their ends”.[46] He added: “They subordinated the interests of Capital + Merchant Finance Limited and its depositors to their own interests.” We have no doubt that this was the conclusion to the correct question about the intention element.
[98] Mr Gray was critical of the omission of the word “intentionally” in this context. He submitted that the only aspect of intention that the Judge addressed was the intention to enter into the transaction. We disagree. The reasons need to be viewed as a whole, and in context. We are satisfied that the mens rea element identified at [95](b) above was addressed, and was rightly found to have been established beyond reasonable doubt.
[99] For completeness we identify some of the features of the transaction that drive us to the same view. The transaction involved Capital + Merchant Group Ltd acquiring the shares in Numeria Holdings Ltd for $10 million and the capital notes issued by Numeria Finance Ltd for $1,660,000. The purchase price was funded as to 100 per cent using funds deposited with it by investors. As recorded above, the Numeria 1 transaction resulted in a capital gain of $5,019,443. The transaction also involved other features described by the Judge and summarised above. We need not repeat these.
[100] The loan of $7.66 million from Capital + Merchant Finance Ltd used to fund the purchase of the shares was found by the Judge not to be in the ordinary course of business as a prudent lender. We agree with that finding. We also agree with the Judge’s reasons (outlined at [88] above) supporting that finding. We highlight the lack of independent valuation and the fact that the irreconcilable conflicts of Messrs Douglas and Nicholls were not dealt with or managed. Mr Gray was critical of some of the Judge’s reasons submitting that they related only to process issues. We reject that criticism. Part of the directorial responsibilities of Messrs Douglas and Nicholls to monitor the affairs of the company and ensure compliance with the requirements of the trust deed required relevant governance processes to be met.
[101] For example, no inquiries were made as to how the loan would be repaid. There was no assessment of any discount of the security if a forced sale were to occur. Most telling was the fact that no collateral securities were taken to support the loan. Messrs Douglas and Nicholls, as the ultimate beneficiaries of the loan proceeds, incurred no personal liability whatsoever for the repayment of the loan, nor for meeting interest payments. The result was that the transaction was in no sense an arms length one: it was, as found by the Judge, a soft loan.[47] The prior consent of the trustee was not sought.[48]
[102] All of these features of the transaction, as well as the multiple breaches of the requirements of the trust deed, inform the intention of the appellants. In our view the inferences available to prove the required intention were compelling. In that context the later disclosure of the related party loan (part only of the whole transaction) in the directors’ certificates and in the prospectuses[49] could not avail the appellants. The finding of proof of the intention element was in all the circumstances of the case inevitable.
[103] For the above reasons the challenge to the verdicts of guilty on count 1 against Messrs Douglas and Nicholls must fail.
Clyde 1
[104] The Judge also analysed this transaction with reference to the four questions set out above at [51]. The Judge concluded that Messrs Douglas and Nicholls had “control over property” for the same reasons given in relation to Numeria 1. Mr Tallentire also had control over the property as by the time of this transaction he was a director of Capital + Merchant [50]nance Ltd.50
[105] On the second question of whether the circumstances required Messrs Douglas, Nicholls and Tallentire to deal with the property in accordance with the requirements of any other person, Wylie J noted that the Crown case in relation to count 2 (Clyde 1) was the same as it was in relation to count 1 (Numeria 1). The Judge found that this element was satisfied.[51] Similarly, in relation to the third question, whether the accused knew of the circumstances, the Judge simply recorded that in relation to Messrs Douglas and Nicholls he relied on his reasoning concerning count 1. Further, there was sufficient evidence to establish that Mr Tallentire knew of the relevant circumstances.[52]
[106] Next Wylie J considered whether the appellants intentionally dealt with the property otherwise than in accordance with the requirements of the debenture trust deed. He answered this question in the affirmative.[53] The Judge referred to the following evidence in reaching the conclusion that the transaction was not in the ordinary course of business as a prudent lender:[54]
- The transaction was not concerned exclusively with a loan advance from Capital + Merchant Finance Ltd to Clyde Investments Ltd. Instead, the advance was part of a wider transaction, the purpose of which was to change the beneficial ownership and control of the Capital + Merchant and Cymbis groups.
- The loan application did not specify the purpose or reason for the loan beyond a general statement that it was “to provide finance to Cymbis Trustees Ltd”.
- The lending committee did not make any inquiries as to when the “positive cashflow” referred to in the loan application would be available.
- The loan application contained erroneous statements in relation to the shareholdings of the Cymbis group. These errors demonstrated that the lending committee had not inquired into the nature of the loan.
- The loan application referred to a valuation prepared by Mr Vallabh. This valuation was based on the erroneous statements referred to above. As a result, it contained serious miscalculations. In addition, there were significant problems with Mr Vallabh’s approach to the valuation. These problems arose because Mr Vallabh was not a valuer.
- No general security agreement was sought from Clyde Investments Ltd. No personal guarantee or other form of collateral security was offered by, or required from, Mr Tallentire as the principal of the borrower.
- The lending committee did not consider whether, for security purposes, the shares in the two small unlisted finance companies should have been discounted due to their illiquidity.
- The lending committee made no assessment of the risks associated with the loan, and did not pause to consider the interests of Capital + Merchant Finance Ltd or its investors. The committee was simply used to “rubber stamp” the transaction.
- No attempt was made to manage the conflicts inherent in the transaction.
[107] The Judge referred to the evidence[55] that supported both the participation in the transaction and the mental element of the appellants:
- Their involvement in meetings and emails which demonstrated Mr Tallentire’s intention to take control of the Capital + Merchant and Cymbis groups.
- All accused signed the “Heads of Agreement” document.
- The application for loan finance was signed by Mr Tallentire, and it was inconceivable that Messrs Douglas and Nicholls did not know about it.
- The loan approval was signed by Mr Tallentire, and there was evidence that Messrs Douglas and Nicholls had also approved the loan.
- The loan offer on 1 November 2006 was accepted by Mr Tallentire on behalf of Clyde Investments Ltd. The loan agreement was signed by Mr Tallentire on behalf of Clyde Investments Ltd and by Mr Douglas on behalf of Clyde Investments Ltd.
- The further loan agreement, also dated 1 November 2006, was signed by Mr Tallentire and Mr Douglas.
- The letter sent to the law firm Stace Hammond giving instructions as to how the funds were to be applied was signed by Mr Nicholls on behalf of Capital + Merchant Finance Ltd, Mr Tallentire on behalf of Clyde Investments Ltd, and Mr Nicholls on behalf of Cymbis Trustees Ltd and Bluewater Investment Holdings Ltd.
- The directors’ certificate disclosing the loan to Perpetual Trust Ltd was signed by Mr Tallentire.
- The specific security agreement securing the advance was signed by Mr Tallentire.
- The deeds assigning the powers of appointment were signed by all three accused.
- Share transfers were signed by Messrs Douglas and Nicholls in respect of the shares in Investment Capital Trust Ltd.
- The accused did not disclose the change of ownership to Perpetual Trust Ltd, notwithstanding that cl 9(1)(n) of the deed stated that the security became enforceable if there was a change of ownership of the company without the trustee’s prior consent.
- The auditors did not know the purpose of the Clyde loans.
[108] Messrs Douglas, Nicholls and Tallentire argued that the requisite intention was not made out as they had each relied on others when carrying out this transaction. They claimed that they had relied on advice of lawyers from Stace Hammond, who had been closely involved in the structuring of the transaction, to ensure that the trustee’s requirements were met. Wylie J rejected this submission holding that there was “nothing to suggest that either Mr Nicholls or Mr Douglas or Mr Tallentire took any specific advice in relation to Capital + Merchant Finance Limited’s obligations under the trust deed”.[56]
[109] Wylie J reached his ultimate conclusion on this count as follows:
[389] All of the accused were involved in the transaction from the outset. While they had varying levels of involvement, in my view, it is clear beyond any reasonable doubt that Messrs Douglas, Nicholls and Tallentire intended to bring the transaction about, and that they breached the requirements contained in the trust deed in order to achieve their ends. They were all driven by self interest. They subordinated the interests of Capital + Merchant Finance Limited and its depositors to their own interests.
[390] I am satisfied beyond reasonable doubt that count 2 is proved against all three accused, Mr Douglas, Mr Nicholls and Mr Tallentire.
Clyde 1 – our analysis
[110] The appellants, including in this case Mr Tallentire, raise the same challenge to the way in which the Judge applied the law on the intention element to the facts of the Clyde 1 transaction. We are satisfied that the Judge did not fall into error in the way in which he did so. Our reasons essentially mirror our analysis of the Numeria 1 transaction, with necessary adjustments for the differences between the two transactions. We will not repeat the reasons given at [94] to [96] above which also apply to [57]e Clyde 1 transaction.57
[111] We are satisfied that the reasons for verdict, and the evidence itself, amply demonstrate that in respect of the Clyde 1 transaction the actus reus requirements, knowledge of the restrictions in the debenture trust deed and the intentional participation of all three appellants in the transaction were established beyond reasonable doubt. Indeed, Mr Gray did not contend otherwise.
[112] On the critical issue of whether the appellants intentionally dealt with the property otherwise than in accordance with the requirements of the trust deed, the Judge asked a short form of that question:[58] “whether the accused intentionally breached the relevant requirements”. He answered that question as follows:
[384] I am satisfied beyond reasonable doubt that the accused voluntarily and deliberately breached the requirements contained in the debenture trust deed. They were motivated from the outset by self-interest. Messrs Douglas and Nicholls wanted to be paid out. Mr Tallentire wished to take over the Capital + Merchant Group and the Cymbis Group. They intentionally used investors’ funds deposited with Capital + Merchant Finance Limited to achieve that end, notwithstanding the requirements imposed in respect of the funds by the debenture trust deed.
[113] The Judge stated that the intention of the accused was clear from a number of facts.[59] We have summarised these earlier at [107] above. The Judge then concluded:
[389] All of the accused were involved in the transaction from the outset. While they had varying levels of involvement, in my view, it is clear beyond any reasonable doubt that Messrs Douglas, Nicholls and Tallentire intended to bring the transaction about, and that they breached the requirements contained in the trust deed in order to achieve their ends. They were all driven by self interest. They subordinated the interests of Capital + Merchant Finance Limited and its depositors to their own interests.
[114] Mr Gray submitted that the Judge’s analysis was flawed in two respects. First, it was directly solely at the question of whether the accused intended to participate in the Clyde 1 transaction, citing the opening sentence in [389]. Second there was no finding that the accused intentionally breached the requirements of the trust deed. He referred to the second portion of the second sentence in [389] to support his submission. We reject both submissions. The contrary is apparent from the Judge’s reasons as a whole and the context of this particular transaction.
[115] The Judge in this section was addressing the correct question already identified. While it would have been preferable had the Judge clearly separated out the actus reus finding that the accused had all participated in the Clyde 1 transaction from the mens rea element, that was nothing more than a semantic infelicity. The Judge had earlier specifically focussed on the intention element,[60] finding that the accused had all been motivated by self-interest and they had intentionally used the investors’ funds to achieve their own ends.
[116] We are satisfied that the prosecution proved beyond reasonable doubt that the accused intentionally dealt with the property otherwise than in accordance with the requirements in the trust deed. We are driven to that view by the following features. Notably Mr Tallentire had been unable to raise the finance, either by loan or external capital raising, to complete the transaction, as his email to the sharebroker showed.[61] Mr Tallentire and his co-directors then used for this purpose depositors’ funds invested with Capital + Merchant Finance Ltd. Significantly the consent of the trustee, Perpetual Trust, was not sought for the change of ownership of the entities involved before either the Clyde 1 or Clyde 2 transactions.
[117] The Clyde 1 transaction related to the first of two loans whereby one director of Capital + Merchant Finance Ltd, Mr Tallentire, bought out the interests of the other two directors in the company, Messrs Douglas and Nicholls. The application for loan finance by Mr Tallentire involved a loan advance of $7.7 million for that purpose. Such transaction was not in the ordinary course of business of Capital + Merchant Finance Ltd as a prudent lender. Although the loan application was for “$7.7 million with interest and fees capitalised until positive cash flow [is] available to the trust”, the lending committee made no inquiries as to when such positive cashflow would be available. The Clyde 1 transaction was beset by the many flaws and inadequacies as identified by the Judge and summarised at [106] above. An important finding in this respect was the evidence of Mr Smith from the lending committee referred to at [39] above.
[118] We agree with the Judge’s findings that the Clyde 1 transaction involved various breaches of the requirements of the trust deed. It was not an arms length transaction. It was clearly a “soft loan”. In the context, as we have already discussed,[62] the later disclosure of the related party loans (again part only of the overall transactions) in the certificates and in the prospectuses could not avail the appellants.
[119] All of these features are relevant, and available, to inform the intention of the appellants. We are satisfied that the inferences available to prove the intention element were compelling. Mr Gray was right to concede in argument that the appellants had “more difficulty” in explaining away the Clyde transactions. They cannot. We therefore consider that the challenge to the verdicts of guilty against all three appeals in relation to Clyde 1 must fail.
Clyde 2
[120] The Judge found in relation to Clyde 2 that all three accused had control over the property, that the circumstances required each of the accused to deal with property in accordance with the requirements of the trust deed, and that the accused knew of those circumstances.[63] Moreover, this transaction was found to be outside the ordinary course of business for the following reasons:[64]
- The transaction was not concerned exclusively with the $4.4 million advance from Capital + Merchant Finance Ltd to Clyde Investments Ltd. Instead, the advance was part of a wider transaction, the purpose of which was to facilitate change in the beneficial ownership of the Capital + Merchant and Cymbis groups.
- The lending committee made no inquiry into any of the matters stated in the loan application.
- There were significant problems with the valuation of Capital + Merchant Business Finance Ltd. The “valuation” used was prepared by the CFO of Capital + Merchant Finance Ltd, Mr Smyth. Mr Smyth was not a valuer. Furthermore, the independent advice received by Mr Smyth was not incorporated into the valuation, Wylie J reached the conclusion that the valuation was “woefully deficient”.
- The lending committee did not consider the interest of Mr McKee-Wright, the CEO of Capital + Merchant Business Finance Ltd. Mr McKee-Wright was entitled to a 20 per cent share of the after-tax profit of Capital + Merchant Business Finance Ltd and a 20 per cent of the value of the sale of the business or shares.
- No general security agreement was sought from Clyde Investments Ltd.
- The lending committee did not consider whether the value of the shares in Capital + Merchant Business Finance Ltd should have been discounted for security purposes.
- The lending committee made no assessment of the risk associated with the loan.
- No attempt was made to manage the directors’ obvious conflicts of interest.
- The application was made and approved with considerable haste, indicating that the lending committee was simply asked to “rubber-stamp” the transaction.
[121] When considering the element of intention Wylie J concluded:
[424] I am satisfied beyond reasonable doubt that the accused voluntarily and deliberately breached those requirements. They were motivated by self-interest. Messrs Douglas and Nicholls wanted to be paid out. Mr Tallentire wished to take over the Capital + Merchant Group and the Cymbis Group. They jointly set out to use investors’ funds for that purpose, and notwithstanding the requirements they knew were imposed on them in relation to those funds.
[122] The Judge considered that intent could be inferred from the following:[65]
- The accused participated in meetings and emails which demonstrated Mr Tallentire’s intention to take control of the Capital + Merchant and Cymbis groups. Mr Tallentire and Messrs Douglas and Nicholls jointly drove the transaction.
- The accused all signed the “Heads of Agreement” document.
- The application for loan finance was signed by Mr Tallentire.
- The loan approval was signed by Mr Tallentire, and there was evidence that Messrs Douglas and Nicholls had also approved the loan.
- The loan offer was accepted by Mr Tallentire on behalf of Clyde Investments Ltd. The loan agreement was signed by Mr Tallentire on behalf of Clyde Investments Ltd and by Mr Douglas on behalf of Capital + Merchant Finance Ltd.
- Email correspondence from Stace Hammond was copied to Messrs Douglas and Nicholls.
- The agreement for sale and purchase of the shares in Capital + Merchant Business Finance Ltd dated 2 November 2006 was signed by Messrs Douglas and Nicholls on behalf of Capital + Merchant Group Ltd, and by Mr Tallentire on behalf of Clyde Investments Ltd. It was also signed by Messrs Nicholls and Smyth on behalf of Capital + Merchant Business Finance Ltd.
- The share transfers were signed by Mr Douglas and Mr Nicholls.
- Mr Nicholls signed a resolution of the board of directors of Capital + Merchant Business Finance Ltd. Messrs Nicholls and Tallentire also signed a resolution of Capital + Merchant Group Ltd authorising it to enter into the sale and purchase agreement.
- Perpetual Trust Ltd was not notified of the change of ownership.
- The auditor was unaware of the effect of the Clyde Transactions.
[123] Wylie J concluded:
[429] I am satisfied beyond reasonable doubt that each of them, Messrs Douglas, Nicholls and Tallentire, intentionally breached the requirements set out in the debenture trust deed, and of Perpetual Trust Limited, in order to achieve their own ends. I am satisfied beyond reasonable doubt that count 3 is proved against all three accused, Mr Douglas, Mr Nicholls and Mr Tallentire.
Clyde 2 – our analysis
[124] Because this transaction was essentially a loan comprising the second tranche of borrowing (amounting to $4.4 million) to complete the Tallentire acquisition, our analysis can be brief. The Judge correctly saw this advance from Capital + Merchant Finance Ltd as part of the wider transaction. Like the Clyde 1 transaction, it was not a loan in the ordinary course of business for a prudent lender. We have summarised earlier the reasons supporting that conclusion,[66] but they include the following:
[406] The lending committee ... did not, for example, query when positive cashflow might become available to the Clyde Trust. It did not pause to consider the security proposed. It did not query how Clyde Investments Limited could be a guarantor when it was also the borrower, or question the worth of the guarantee proposed, or ask what the assets of the Clyde Trust were that it was suggested should limit the trustee’s liability. It did not pause to consider whether it should seek a general security agreement from the company. It did not seek personal guarantees from Mr Tallentire, the principal behind Clyde Investments Limited. It did not seek any information about the creditworthiness of either the Clyde Trust or Clyde Investments. If Capital + Merchant Finance Limited was acting as a prudent and responsible lender investing other people’s money, it should have done so.
[125] The Clyde 2 transaction also involved several breaches of the requirements of the trust deed.[67] It was not at arm’s length and was a further “soft loan”.
[126] As with Clyde 1, the Judge posed the correct question regarding the accused intentionally dealing with the property otherwise than in accordance with the requirements of the trust deed. In terms of analysis, we are satisfied that the prosecution proved this element beyond reasonable doubt.
[127] To the extent that Clyde 2 involved (a) the actus reus elements that property be dealt with otherwise than in accordance with the requirements imposed, and (b) the participation of all accused in the transaction,[68] both were proven on the evidence. The same is true of the intention of the appellants to participate deliberately in the transaction. That leaves the intention to deal with the property otherwise than in accordance with the requirements of the trust deed. We are in no doubt that this element was also proven. As the Judge said:
[424] I am satisfied beyond reasonable doubt that the accused voluntarily and deliberately breached those requirements. They were motivated by self-interest. Messrs Douglas and Nicholls wanted to be paid out. Mr Tallentire wished to take over the Capital + Merchant Group and the Cymbis Group. They jointly set out to use investors’ funds for that purpose, and notwithstanding the requirements they knew were imposed on them in relation to those funds.
[128] The findings in the second sentence and following are particularly apposite. They are directed at the correct question of intention. We reject Mr Gray’s criticism that the Judge only decided that the accused intentionally participated in the Clyde 2 transaction. Viewed as a whole and in context, the reasons for verdict answer what Mr Gray accepted was the correct question. While some of the Judge’s reasons in [425] were directed at the participation of the accused, others, for example (a) and (b), were directly relevant to intention.
[129] Irrespective of the Judge’s approach, we are satisfied that the prosecution proved the intention element beyond reasonable doubt. We do not repeat the reasons supporting this conclusion arising from the background to the Clyde transactions.[69] The features of the Clyde 2 transaction are also available to support the inference of intention. In a sense, Clyde 2 was in the nature of a second helping of investors’ deposits to facilitate the transfer of ownership, notice of which was not given to the trustee. Self interest on the part of the accused was allowed to override their corporate obligations and directors’ responsibilities.
[130] For the above reasons, the challenge to the verdicts of guilty against all three appellants in respect of Clyde 2 must fail.
Numeria 2
[131] This transaction formed the basis of count four of the indictment. Only Messrs Nicholls and Tallentire were charged with that count. We deal briefly with this transaction because it usefully illustrates how the Judge, correctly in our view, dealt with the intention element.
[132] Wylie J was satisfied that elements one to three were met: the accused all had control over the property, in circumstances that required them to deal with that property in accordance with the trust deed, and each knew of those circumstances.[70] The Judge was also satisfied that the transaction involving the purchase of shares in Numeria Leasing by Capital + Merchant Finance Ltd was not in the ordinary course of business. Although it was not necessarily out of the ordinary course of business for Capital + Merchant Finance Ltd to invest in entities or ventures, the particular circumstances of this transaction meant that it fell outside what could be considered to be the ordinary course of business of Capital + Merchant Finance Ltd. The Judge also found that the transaction was not an arms length one and involved breaches of several requirements of the trust deed.[71]
[133] The Judge then considered whether Messrs Nicholls and Tallentire intentionally breached the relevant requirements of the trust deed. Here the Judge concluded:
[465] I am not satisfied beyond reasonable doubt that the accused voluntarily and deliberately breached those requirements. Rather, it seems to me that there is a reasonable possibility that they did not do so.
[134] A critical distinction with this transaction was that one of the parties to it, Numeria Finance Ltd and not Capital + Merchant Finance Ltd, sought the prior consent of Perpetual Trust Ltd to the transaction. The Judge reasoned:
[466] ... Both Mr Lancaster and Mr Lithgow [of Perpetual] were involved in supervising the Numeria Finance Limited debenture trust deed. Both accepted that had they become aware of any breach or potential breach of the Capital + Merchant Finance Limited trust deed, they would have been obliged to take action, and they would have taken action. They did not do so. It must follow that neither Mr Lancaster, nor Mr Lithgow, believed that there was any breach by Capital + Merchant Finance Limited of its debenture trust deed.
[467] Mr Lithgow acknowledged that Perpetual Trust Limited had to look at both sides of the transaction when it was considering the request for consent, and that it was well aware of Capital + Merchant Finance Limited’s involvement. The whole transaction was put to Perpetual Trust Limited as part of a “Capital + Merchant restructure”. That it was seen in that light by Perpetual Trust Limited is confirmed by the fact that Perpetual Trust Limited imposed a condition to the consent in relation to cashflow, ensuring that it came back to Capital + Merchant Finance Limited via Capital + Merchant Group Limited.
[468] The absence of any demurrer, query, or action by Perpetual Trust Limited, goes a long way towards negating the assertion that Messrs Nicholls and Tallentire intentionally breached the requirements of Capital + Merchant Finance Limited’s debenture trust deed.
[135] The Judge also noted that a report from Mr Smyth to the board of Capital + Merchant Finance Ltd made at the time of this transaction recorded that the process had been given approval by Perpetual Trust Ltd.[72] Therefore Wylie J was not satisfied beyond reasonable doubt that Messrs Nicholls and Tallentire intended to breach the requirements of the debenture trust deed. Each was found not guilty of this charge.
[136] The actions of the accused at the time of entering into the Numeria 2 transaction were relevant to any inference concerning intention to deal with the property otherwise than in accordance with the requirements of the trust deed. The important element of prior disclosure on behalf of the borrower Numeria Finance Ltd was sufficient to raise a reasonable doubt on the element of intention. Among other distinguishing features, such disclosure was not present with the Numeria 1 and the Clyde 1 and 2 transactions.
Conclusion on conviction appeals
[137] For the reasons set out above, the appeals against conviction by all three appellants must be dismissed. We have held that Wylie J did not err in his application of any aspect of the mental elements applicable to charges under s 220. We have independently considered the evidence and each of the individual transactions. For the Numeria 1 and Clyde 1 and 2 transactions the prosecution has proved beyond reasonable doubt in each case that the accused intentionally dealt with the property concerned otherwise than in accordance with the requirements of the debenture trust deed. In the case of the Numeria 2 transaction the defence had raised a reasonable doubt on this element. Wylie J properly acquitted Messrs Nicholls and Tallentire on this charge.
Sentence appeal
[138] We will first address the Judge’s approach to sentencing before summarising the submissions on behalf of the appellants. We will then give our evaluation as to why we do not consider the sentences to be manifestly excessive.
Judge’s approach
[139] First the Judge reviewed the pre-sentence reports, noting that both Mr Douglas and Mr Nicholls had been assessed as at a low risk of re-offending, and as having a high motivation not to do so. Mr Tallentire’s pre-sentence report described his risk of re-offending as low, and his motivation to change as at a moderate level. The Judge referred to a number of character references which were received in support of all three appellants. He also considered letters received by the Court. Messrs Douglas, Nicholls and Tallentire had each submitted a letter of remorse explaining their regret for their actions.
[140] The letter from Mr Douglas stated: “I was out of my depth and feel I should not have held the position of responsibility that I did as I did not possess the rigours of mind to carry out the duties properly”. Mr Nicholls wrote that his actions involved “immature and irresponsible behaviour from the director of a company which had so many responsibilities to so many interested parties. ... I was truly neither qualified enough, nor trained nor experienced enough to have held that position of responsibility”. Mr Tallentire stated: “My self-interests also clouded my objective analysis of the prudence of lending to Clyde”.
[141] The victim impact statements received by the Court recorded the impact of this offending on investors in Capital + Merchant Finance. Wylie J recorded that many of these investors were elderly persons who had lost life savings.
[142] The Judge drew on the list of factors identified by this Court in R v Varjan[73] as being relevant to sentencing. Taking these matters into account, the culpability of each of the appellants was high.[74] Each of the offences involved significant planning and premeditation, and very large amounts of money were involved. Each of the appellants had abused his position as a director of Capital + Merchant Finance Ltd, and each had an active and significant involvement in the various offences. There was a significant and serious impact on victims and on the finance industry generally.
[143] The mitigating factors of the offending were stated to be the fact that the transactions had been subsequently disclosed as related party transactions in the directors’ reports to Perpetual Trust Ltd, and the involvement of outside professionals.
[144] The Judge considered the relevant case law, prefacing his observations with the following statement:[75]
Counsel have referred me to a very large number of authorities. Many of them do not concern offending under s 220. It has to be emphasised that Messrs Douglas, Nicholls and Tallentire have been found guilty of theft. Theft is a serious offence. Sentences imposed on finance company directors for offending under the Securities Act 1978 are not directly on point.
[145] The Judge referred to the case of R v Swann.[76] That case involved two offenders who were each convicted of three representative charges under ss 229A(b) and 228(b) of the Crimes Act. Those sections are in the same subpart of the Crimes Act as s 220 and also have a maximum penalty of seven years’ imprisonment. Both accused submitted fraudulent invoices to Otago District Health Board over six years. In excess of $16.9 million was obtained. In respect of Mr Swann, the principal offender, Stevens J adopted a starting point of 10 years six months’ imprisonment, and made an allowance of one year for Mr Swann’s clear record, reparation, and remorse. In respect of Mr Harford, a starting point of five years’ imprisonment was applied with an allowance of nine months’ for Mr Harford’s clear record, reparation, and co-operation.
[146] The Judge next discussed Watson v R.[77] Mr Watson pleaded guilty to two counts of theft including one count of theft by a person in a special relationship. The charges related to the theft of $5.5 million from the Dairy Containers group of companies while Mr Watson serving as the General Manager and Financial Controller of those companies. A starting point of eight years’ imprisonment was adopted, with a 20 per cent discount imposed to reach an end sentence of six and a half years’ imprisonment. This was upheld on appeal.
[147] The Judge also considered R v Bowden.[78] Mr Bowden was a director of Five Star Consumer Finance Ltd. The offending of Mr Bowden and his associates cost investors some $37.5 million. However, Mr Bowden was not the driving force behind the offending. Heath J adopted a starting point of four years, nine months’ imprisonment. This sentence was reduced dramatically to account for a significant number of mitigating factors. The final sentence was of nine months’ home detention and 100 hours’ community work. Mr Bowden’s co-offenders, Mr Kirk and Mr MacDonald, were sentenced to two years, eight months’ imprisonment and two years three months’ imprisonment respectively.[79] Neither played a pivotal part in the offending.
[148] Other cases cited to Wylie J by counsel included R v Ludlow,[80] Gray v Serious Fraud Office,[81] R v Harrison,[82] R v Wallnutt,[83] R v Rose,[84] R v Renshaw,[85] R v Moses,[86] R v Graham,[87] R v Petricevic,[88] and R v Buckley.[89]
[149] The Judge then considered the appropriate starting point for Messrs Douglas and Nicholls. In relation to the Clyde 1 transaction, the lead charge, Wylie J adopted a starting point of six years. A starting point of six years was also adopted for Clyde 2, and that offending was taken as being concurrent with the Clyde 1 offending. In relation to the Numeria 1 offending, a starting point of two years, six months’ imprisonment was adopted. That offending was treated on a cumulative basis. Wylie J then considered the totality principle and adopted an overall starting point of eight years six months’ imprisonment.
[150] The Judge found no aggravating features personal to either offender. He held that a discount of six months was justified given the previous unblemished records and good character of the appellants. Finally, a discount of six months was made for remorse. This left an end sentence of seven and a half years’ imprisonment. No minimum period of imprisonment was imposed.
[151] In respect of Mr Tallentire, the Judge adopted a starting point of six years’ imprisonment. Discounts of six months for previous good character and six months for remorse were then applied. This left an end sentence of five years’ imprisonment on each charge, to be served concurrently. No minimum period of imprisonment was imposed.
Submissions on sentence
Messrs Douglas and Nicholls
[152] The appellants submitted that the Judge erred in his assessment of the correct test for intention, and that as a result the sentence needed to be reduced to reflect the actual level of criminal culpability. For that reason, the appellants proposed that this Court consider the appropriate sentence “from first principles”.
[153] As to a starting point, the appellants relied on a number of authorities. The first was R v Buckley,[90] in which Mr Buckley pleaded guilty to four charges of false statement by a promoter, 19 charges of theft by a person in a special relationship, one charge of false statement in an advertisement, and one charge of false statement to a trustee. $13.25 million was lost as a result of Mr Buckley’s actions. The sentencing Judge adopted a starting point of four and a half years for the false statement charges with an uplift of 18 months for the s 220 charges. A concurrent starting point of three years was adopted for the other charges. A 25 per cent discount was given for the guilty plea, and another 25 per cent discount was adopted for remorse, cooperation, rehabilitation and lapse of time.
[154] The other authorities referred to by the appellants included those referred to by Wylie J in his sentencing decision: R v Kirk; R v Bowden; R v Ludlow; and R v Petricevic.
[155] Next, the appellants submitted that their culpability is at a lower level than assessed by Wylie J, as the circumstances of the case did not involve concealment or dishonesty. While there were large sums of money involved, the transactions were genuine loans and there is no evidence that they would not have been repaid had the finance industry collapse not occurred. Furthermore, the offending is in relation to two isolated transactions: there is no evidence of ongoing wrongful conduct. Finally, it was accepted by the trial Judge that Capital + Merchant Finance Ltd did not collapse as a result of the offending, making it difficult to assess the magnitude of the impact of the offending on investors.
[156] The appellants submitted that the Judge correctly identified that there were no general aggravating factors. In terms of mitigating factors, counsel submitted that Wylie J had erred in not considering that the evidence established that the parties had received legal advice to the effect that it was possible that the transactions would be in the “ordinary course of business”, and that as a result he erred in failing to consider this as a mitigating factor.
[157] The appellants argued that the Judge erred by making the sentence for the Numeria 1 transaction cumulative upon the sentences for the Clyde 1 and 2 transactions. They submitted that a cumulative approach had not been taken in any of the other finance company cases.
[158] Taking all these factors into consideration, counsel submitted that an appropriate starting point would be approximately three years’ imprisonment.
[159] In terms of personal mitigating factors the appellants submitted that a discount ought to have been given for the “good conduct” of the appellants during the trial process. While Messrs Nicholls and Douglas did not plead guilty, they did not contest things that were not seriously contestable. Second, counsel argued that the age of the appellants (Mr Douglas is 59 and Mr Nicholls 57) ought to be taken into account. Third, counsel contended that greater discounts ought to have been given for the appellants’ remorse and previous good character.
[160] Taking these factors together, the appellants submit that a discount of approximately 25 per cent would be appropriate.
[161] Finally, the appellants submitted that a sentence of home detention was appropriate. Because the transactions pre-date 1 October 2007, jurisdiction to impose a sentence of home detention is not dependent upon the requirement that the Court would otherwise sentence the offender to a sentence of 2 years or less. It was submitted that here home detention would be appropriate given the fact that the convictions will weigh heavily on the appellants. The appellants drew attention to the fact that they are willing and able to engage in community work.
Mr Tallentire
[162] Mr Tallentire made submissions on appeal against sentence separately to the submissions of Messrs Douglas and Nicholls. As to the starting point, Mr Tallentire submitted that Wylie J adopted a starting point that was unduly high and inconsistent with other cases.
[163] First, he submitted that the degree of culpability assessed by the Judge was too high. It was incorrect to characterise the offending as involving “significant planning and premeditation”. That was because no related party loans had been contemplated until a little under a month prior to the Clyde loans. Furthermore, there was no evidence that the legal structure had been designed by Mr Tallentire. Mr Gedye submitted that Mr Tallentire’s liability was not so high as to warrant a six year sentence when it was recognised that the maximum sentence available was seven years’ imprisonment.
[164] Second, counsel submitted that it was incorrect to categorise Mr Tallentire’s actions as involving a severe breach of trust. That was because all offending under s 220 involves a breach of trust due to the fact that a special relationship must be found as an element. Accordingly, breach of trust is already incorporated into the maximum penalty for the offence.
[165] Third, while the sum of money lent was $12.1 million, it was incorrect for the Judge to approach the case as though Mr Tallentire had stolen that sum. That is because a soft loan, in breach of requirements, is still a loan. Counsel submitted this Court should draw a clear distinction between intentional stealing of money (as in Swann) and cases involving loans in which the borrower intends to repay.
[166] Fourth, Wylie J overstated the impact on victims. Counsel submitted that the collapse of Capital + Merchant Finance Ltd occurred some time after the transactions in question.
[167] Finally, Mr Tallentire’s liability was not at the high end of the criminal spectrum when compared to relevant authorities. This submission was made relying on the same authorities identified by Wylie J and again by Messrs Douglas and Nicholls in their submissions on appeal.
[168] Taking these factors together, Mr Tallentire submits that a starting point of between three to four years’ imprisonment is appropriate. From this starting point greater discounts were required for remorse and previous good character. It is recommended that discounts of 15 per cent were required for each of these features.
Respondent’s submissions
[169] Mr Williams for the Crown submitted that the Judge’s sentencing remarks reflected a careful consideration and weighing of the various factors relevant to culpability. He emphasised that Messrs Douglas and Nicholls were convicted of the theft of $19.76 million of investor’s funds,[91] and Mr Tallentire was convicted of the theft of $12.1 million.[92] While the offending did not require proof of dishonesty, had investors known the true position about related party lending, no reasonable investor would have invested in Capital + Merchant Finance debenture stock. The Judge was correct to place emphasis on these factors.
[170] In response to the suggestion that the Judge erred in taking into account the victim impact statements made by Capital + Merchant investors, Mr Williams referred to s 20 of the Victims Rights Act 2002, which provides that the prosecutor may, if it is appropriate to do so, treat any person who was disadvantaged by an offence as a victim of that offending.
[171] Mr Williams emphasised that Wylie J had expressly found that the offending was sophisticated and involved significant planning and premeditation.[93] These factors had to be reflected in the final sentences.
[172] As to the case law, counsel referred us to four authorities. In R v Moses,[94] Heath J sentenced three former directors of Nathans Finance NZ Ltd on breaches of s 58 of the Securities Act. The offending was categorised as grossly negligent but not dishonest. Starting points of three years, four months and three years, three months were upheld by this Court on appeal.[95]
[173] In R v Rose,[96] this Court adopted a starting point of seven or eight years for various dishonesty offences stemming from Mr Rose’s employment at Dairy Containers Ltd. The offending took place over five years and resulted in a loss of $8.4 million to the company.
[174] In Watson v R Mr Watson pleaded guilty to one count of theft and one count under s 220. He was convicted of stealing $5.5 million over a 10 year period. A starting point of eight years was not challenged on appeal.[97]
[175] In Singh v Serious Fraud Office,[98] a starting point of six years was upheld on appeal. Ms Singh pled guilty to one charge of dishonestly accessing a computer system and thereby causing loss, three charges of obtaining by deception and three charges of using documents dishonestly. A total of $1.3 million had been misappropriated.
[176] Mr Williams submitted that Wylie J’s decision to impose a cumulative sentence was entirely in accordance with s 84 of the Sentencing Act 2002. The Numeria transaction was unrelated in time and circumstances to the Clyde transactions.
[177] For these reasons, the Crown submitted that the sentences imposed on all appellants were not manifestly excessive.
Our evaluation
[178] We have concluded that none of the sentences imposed by Wylie J are manifestly excessive. Although the Judge acknowledged that he had imposed “stern sentences”,[99] none were outside the proper range. Such sentences were required to hold the appellants accountable for their offending, as well as for denunciation and deterrence purposes.
[179] We consider that the factors adopted by this Court in Varjan are a useful basis for analysis:[100]
[22] Culpability is to be assessed by reference to the circumstances and such factors as the nature of the offending, its magnitude and sophistication; the type, circumstances and number of the victims; the motivation for the offending; the amounts involved; the losses; the period over which the offending occurred; the seriousness of the breaches of trust involved; and the impact on victims.
[180] Having regard to these factors, it is clear that each of the appellants has a high level of culpability. All three have been convicted of theft as a person in a special relationship. The Messrs Nicholls and Douglas have been convicted of theft by a person in a special relationship to the sum of $19.76 million. Mr Tallentire has been convicted of the theft of $12.1 million. Simply put, this is theft on a grand scale.
[181] We do not accept the suggestion by the appellants that this offending was in some way less serious than other offending under s 220. When investors deposited their funds (in a number of cases their life savings) they were entitled to expect that those responsible for governing Capital + Merchant Finance Ltd would comply with the requirements of the debenture trust deed and the corporate governance requirements of the Companies Act 1993. These appellants did neither.
[182] The appellants elevated their own self-interest above the interests of the depositors who had trusted them. They helped themselves to various soft loans, ignoring not only the strict requirements of the trust deed but also the most elementary of prudential lending requirements. The related party restrictions in the trust deed were intended to prevent this very type of activity. However, the factual findings of the Judge on liability amply demonstrate how the appellants intentionally, and we would add cynically, avoided these requirements and obtained considerable amounts of depositors’ funds for their own selfish purposes. It was not their money; the depositors had trusted them to invest the funds wisely and in accordance with the trust deed. These transactions involved an abuse of trust and a clear breach of the criminal law governing theft. The fact that some legal advice may have been sought on certain aspects of the transactions cannot assist the appellants.[101] Accordingly they cannot now claim to be less responsible than others convicted under s 220.
[183] Moreover, we consider that Wylie J was correct to take account of the impact of this offending on commerce and the finance industry more generally.[102] Offending of this nature has long-lasting impacts on investor confidence, which in turn has damaging effects for the economy as a whole.
[184] The various cases cited by counsel are of limited assistance. We prefer to apply the various factors relevant to culpability. All of these were carefully addressed by the Judge in his sentencing decision.[103] We are conscious too that the Judge had the benefit of presiding over some four weeks and saw and heard all the witnesses.
[185] We are satisfied that the appellants have shown no error in the Judge’s assessment of the applicable starting points. Neither did the Judge err in making the starting points cumulative in respect of the offending by Messrs Douglas and Nicholls. We agree with the Judge’s assessment that the offending by each appellant was “very serious”.[104] It is also beyond question that, as the Judge found, “the Clyde transactions involved ‘the most egregious offending’”.[105] In many respects it was commercially breathtaking.
[186] Then the Judge took into account all relevant mitigating factors for each of the appellants.[106] The Judge gave generous discounts for such mitigating factors. We note that none of the appellants offered reparation. Accordingly, no further allowance was available. We reject the submissions on behalf of all the appellants that further discounts for mitigating features should have been allowed.
[187] It follows from what we have already said that a sentence of imprisonment in each case was entirely appropriate. A sentence of home detention plus community work was by any measure out of the question.
[188] It follows that the appeal against sentence by each appellant must be dismissed.
Result
[189] The appeals against conviction and sentence are dismissed.
Solicitors:
Lee Salmon Long, Auckland for Appellant Tallentire
Wilson
Harle, Auckland for Appellants Douglas and Nicholls
Crown Law Office,
Wellington for Respondent
APPENDIX
Diagram One:
Ownership structure of the Capital + Merchant group
in 2003
Diagram Two:
The Numeria 1 transaction
Diagram Three:
Distribution of the capital gain of $5.02 million
by the Investment Capital Trust
Diagram Four:
Ownership structures prior to the Clyde
Transactions
Diagram Five:
The Clyde 2 transaction
Diagram Six:
Ownership structure of the Capital + Merchant group
prior to Numeria 2
Diagram Seven:
The Numeria 2 transaction
[1] R v Douglas [2012] NZHC 1746 [Reasons for verdict].
[2] R v Douglas [2012] NZHC 2271 [Sentencing decision].
[3] Mr Douglas was a director of
the company from 18 January 2002 until 15 February 2007. Mr Nicholls was a
director from 18 January
2002 until 1 November 2005. He was reappointed as a
director on 31 March 2006 and remained a director thereafter.
Mr Tallentire
was appointed a director on 13 October 2006 and remained a
director thereafter. He had previously been the company’s Chief
Executive.
[4] See Reasons for
verdict, above n 1, at [310] and below
at [88].
[5]
Pursuant to cl 7.
[6] For a
detailed account see Reasons for verdict, above n 1, at
[86]–[102].
[7] Reasons for
verdict, above n 1, at
[367]–[368] (Clyde 1) and [409]–[410] (Clyde
2).
[8] At
[367].
[9] At
[369].
[10] At
[407]–[409].
[11] See
[105]–[119] (Clyde 1) and [120]–[130] (Clyde 2) below.
[12] At
[149].
[13] At
[162].
[14] At
[249].
[15] At
[152]–[155].
[16] At
[158].
[17] R v Simcock
[2004] NZCA 92; [2004] 3 NZLR 433 (CA).
[18] See
the Crimes Amendment Act 2003, ss 2 and
15.
[19] R v Sizemore CA
290/05, 5 December 2005 at
[27].
[20] Ibid at [26].
[21] See eg. s 219 (theft
or stealing); s 226 (conversion of vehicle); s 228 (dishonestly
taking or using document); s 230 (taking,
obtaining or copying trade
secrets).
[22] Nisbet v R
[2011] NZCA 285 at [48] and
[50].
[23] Haynes v Ministry
of Transport [1988] NZHC 500; (1988) 3 CRNZ 587 (HC) at
591.
[24] New Zealand Police
v K(CA320/2011) [2011] NZCA
533.
[25] At
[28].
[26] At
[149].
[27] As articulated at
[149] and [214] of the Reasons for
verdict.
[28] At
[297]–[324].
[29] At
[302](d).
[30] At
[325]–[333].
[31] At
[383]–[389].
[32] At
[424].
[33] At
[286].
[34] At
[291]–[295].
[35] At
[309].
[36] At
[310].
[37] At
[312].
[38] At
[313].
[39] At
[314].
[40] At
[316].
[41] At
[317].
[42] At
[323]–[325].
[43] At
[327].
[44] As discussed at [85]
above.
[45] At
[332].
[46]
Ibid.
[47] At
[322].
[48] At
[298].
[49] As the Judge
described at
[152]–[154].
[50] At
[336]–[340].
[51] At
[341]–[344].
[52] At
[345]–[351].
[53] At
[384].
[54] At
[361]–[379].
[55] At
[385]–[387].
[56] At
[388].
[57] The Judge’s division
of the analysis for Clyde 1 was at [352], below the heading which asked the
correct question concerning
this
element.
[58] At
[383].
[59] At
[385].
[60] At [384], quoted at
[112]
above.
[61] The passage from the
email is set out at [26]
above.
[62] At [55]–[56]
above.
[63] At
[392]–[394].
[64] At
[395]–[422].
[65] At
[425]–[427].
[66] At [120]
above.
[67] At
[420]–[423]. Although the Judge was not satisfied that cl 6(4)(g)
was breached: see [422].
[68]
As identified at [95] and [96]
above.
[69] At [116]
above.
[70] At
[431]–[433].
[71] At
[461]–[463].
[72] At
[469]–[470].
[73] R v
Varjan CA 97/03, 26 June 2003 at
[22].
[74] Sentencing decision,
above n 2, at [93].
[75] At
[95].
[76] R v Swann HC
Dunedin CRI-2007-012-4181, 11 March
2009.
[77] Watson v R
[2012] NZCA 17.
[78] R
v Bowden [2012] NZHC
1249.
[79] R v Kirk DC
Auckland CRI-2009-004-24026, 21 December
2010.
[80] R v Ludlow DC
Auckland CRI-2009-004-23758, 20 October 2011.
[81] Gray v Serious Fraud
Office HC Auckland CRI-2010-404-476, 31 March
2011.
[82] R v Harrison
[2007] NZCA 297.
[83] R
v Wallnutt CA182/93, 8 August 1993.
[84] R v Rose [1990] 2
NZLR 552 (CA).
[85] R v
Renshaw (1992) 8 CRNZ 695 (HC).
[86] R v Moses HC
Auckland CRI-2009-004-1388, 2 September 2011.
[87] R v Graham [2012]
NZHC 575.
[88] R v
Petricevic [2012] NZHC 785.
[89] R v Buckley DC
Auckland CRI-2011-004-17116, 30 August 2012.
[90] Ibid.
[91] $7.66 million (Numeria) +
$7.7 million (Clyde 1) + $4.4 million (Clyde 2) = $19.76
million.
[92] $7.7 million
(Clyde 1) + $4.4 million (Clyde 2) = $12.1
million.
[93] Sentencing
decision, above n 2, at [93][a] and
[c].
[94] R v Moses,
above n 86.
[95] Doolan v R [2011]
NZCA 542 at [43] and [48].
[96]
R v Rose, above n 84.
[97] Watson v R, above n
77.
[98]
Singh v Serious Fraud Office HC Auckland CRI-2008-404-361, 4 March
2009.
[99] Sentencing decision,
above n 2, at
[130].
[100] R v
Varjan, above n 73.
[101] The limited scope of any
legal advice received is apparent from the reasons for verdict at
[388](c).
[102] At
[93](j).
[103] Particularly at
[93][a] to [j].
[104] At [107]
for Messrs Douglas and Nicholls and at [117] for
Mr Tallentire.
[105] At
[109].
[106] At
[113]–[114] for Messrs Douglas and Nicholls and at [119]–[120] for
Mr Tallentire.
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